What’s the Big Oracle Problem That No One Is Talking About?

Wall Street is focusing on Oracle's big revenue and EPS miss, but for long-term investors there might be something far worse to worry about.

Jun 23, 2014 at 10:30AM

Oracle Corporation (NYSE:ORCL) shares fell sharply after the company's fiscal fourth quarter missed revenue and EPS expectations. As a result, investors are showing some fear that its initiatives to grow software in the cloud is facing roadblocks. Yet, compared to cloud leaders Amazon.com, Inc (NASDAQ:AMZN) and Microsoft Corporation (NASDAQ:MSFT) , are these concerns appropriate?

Currently insignificant
Oracle is a company that earns 75% of its revenue from software, and over the last year has worked diligently to create a recurring revenue business model through this large presence. One method has been large investments and acquisitions in the cloud as Oracle attempts to become a market leader and dominant in cloud app (SaaS), app platform (PaaS), and the cloud infrastructure (IaaS) industries.

In its fiscal fourth quarter these businesses created $450 million combined and accounted for only 4% of its total revenue.   While these businesses are small, they are the company's fastest growing segments. As the market for such services grow larger, most analysts believe that they will eventually become a large piece of the company's overall fundamental pie.

Here's the problem
The problem for Oracle in the cloud industry can be seen once you dig deeper into the numbers, or look beyond the headlines. At first glance, Oracle's 25% growth in the combined SaaS and PaaS segment and its 13% growth in laaS looks solid. Especially when you consider that overall revenue grew just 3.4%. Yet these numbers actually represent a loss in market share.

Synergyresearch Cloud Market

Amazon and Microsoft are the current market leaders in the laaS and PaaS industries. In the first three months of 2014 Amazon and Microsoft saw year-over-year growth of 67% and 154%, respectively. Amazon currently commands 30% of the overall market while Microsoft owns a much smaller 8% share,   but is gaining ground quickly. The remaining market is saturated with big and small technology companies that have services of their own.

Why is everyone interested in the cloud?
In the first quarter Synergy Research estimates that the overall laaS and PaaS market grew 50% with trailing 12 month revenues surpassing $12 billion. In the first quarter alone total revenue reached $3.5 billion. Therefore, Amazon surpassed $1 billion in quarterly sales while Microsoft's revenue is fast-approaching $300 million.

With that said, Oracle reporting $450 million would lead many to believe that its market share is larger than Microsoft, but the key element investors must take into consideration is its SaaS presence. Neither Microsoft nor Amazon's figures are shown including SaaS, which is notably Oracle's largest segment.

Therefore, with growth of just 25% in its combined SaaS and PaaS segment and a 13% increase in laaS, Oracle's growth in these key divisions is underperforming the overall industry and significantly lagging the leaders. In other words, Oracle is losing market share in an industry of emphasis.

Foolish Thoughts
With all things considered, Oracle's underperformance in the cloud may seem insignificant, but according to top technology companies like Microsoft and leaders like Amazon, the cloud is the future of technology. It's a market that experts believe will create nearly $47 billion in annual revenue by 2018 , one that's so important that Amazon's cloud business is already estimated to be worth $50 billion today .

Therefore, there are large gains to be created in owning stock of companies that control this market, like Amazon and Microsoft. As for Oracle, it's increasingly difficult to be bullish when its problems in this space are so evident.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Brian Nichols owns shares of Apple. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com, Apple, Microsoft, and Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information